The news hasn't been pretty at L Brands (NYSE:LB), the owner of Victoria's Secret and Bath & Body Works. So it's no wonder that investors have sent the shares smartly lower over the last year. Only that's pushed the retailer's dividend to a level that should interest income-focused investors. Here's a quick primer on the stock.
The bad news
The big problem at L Brands these days is Victoria's Secret. This concept makes up nearly two-thirds of the company's top line and saw same store sales decline 2% in the third quarter. It's been a weak performer for a little while, with flat year to date same store sales weighing on same store sales growth of 4% at Bath & Body Works to leave the company's same store sales through the first nine months of the year at just 1%.
The company knows there is a problem and during the third quarter warned that the next year or so could be difficult. Adding a little more worry to the picture, Victoria's Secret lost its top executive earlier in the year and has been shutting down product lines. In other words, it's retrenching in a notable way.
The good news
But there is some good news. Despite the same store sales decline at its most important brand, overall sales continue to push higher after bottoming out in 2010. That's not a trend that can go on forever, but over a short period it isn't the worst thing in the world. Essentially, the company is opening more stores and sales from those new stores are powering the top line.
The risk in this is that the stores it's opening are in increasingly less desirable locations. Since both of L Brands' core concepts are fairly ubiquitous in the United States, that's a worthwhile issue to monitor. That said, there's still opportunity in the international market. And it's worth keeping in mind that Victoria's Secret has a unique niche, sitting at the high end of affordable. In other words, its wares are affordable luxury. Not to mention the brand is somewhat iconic.
So the core brand at the retailer is working through a soft patch, but it has a strong underpinning. And despite the current headwinds L Brands remains wildly profitable. For example, although earnings were down 24% year over year in the third quarter, the company still made $0.42 a share. Through the first nine months of the year, the company earned $1.72 a share (down around 9% year over year). And those are the weak quarters, since sales and earnings typically skyrocket in the fourth quarter on the strength of holiday sales.
Will this holiday season be weak? Sure. But I wouldn't expect Victoria's Secret to suddenly become a money loser. That gives the retailer time to deal with the problems.
So L Brands is a highly profitable company with solid brands going through a tough patch. But investors have pushed the price of the stock down more than 25% over the past year. That drop has pushed the yield up to around 3.3%. Note, too, that L Brands has increased its distribution each year since 2011. So income investors seeking an above-market yield should be interested in what appears to be a fallen angel stock.
However, it gets better. If you look at the yield history for L Brands, 3.3% is easily at the high end of the company's normal range. It shot to 9% or so during the 2007 to 2009 recession, but other than that extreme outlier, 3% is the top of the range. In fact, the average over the past five years is closer to 1.9%. Investors have put L Brands on the dividend sale rack.
That doesn't mean you should jump aboard. There are real problems for the company to deal with and over the near term things might not be getting better. If you are going to step in here you have to believe in the turnaround story.
However, with a highly profitable business and a strong brand name there's good reason to think L Brands has plenty of time to turn things around. And even if you aren't sure about the turnaround just yet, the dividend yield is clearly saying it's worth taking a deeper dive, just in case.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.